Human erythrocytes subjected to controlled hypotonic dialysis are capable of encapsulating and retaining drugs. Under selected conditions encapsulation has been reported to occur by an endocytosis process. The mechanism by which encapsulation occurs under conditions which are conducive for endocytosis to occur was studied. An analysis of the percentage of cells with endocytic vacuoles was made for cells dialyzed to optimal and suboptimal osmotic pressures for encapsulation. No differences were found with approximately 20% of cells from all preparations containing vacuoles. Transmission electron micrographs of cells in different stages of carrier cell preparation reveal endocytic vacuoles both with and without hemoglobin. However, based on the percentage of exogenous substance encapsulated, encapsulation appears to occur primarily by diffusion and secondarily by endocytosis.